A Way To Reduce The Risks Of Investing In China

Many American investors recognize the potential of the rapidly-maturing Chinese economy. Despite China's GDP growth slowing to about 7.1 percent in 2015, the U.S. economy has nowhere near the long-term growth potential that China does. However, American investors are cautious about putting too much money into Chinese companies when they have no idea what might be going on behind the scenes.
China remains the leading emerging market
In a recent report, Bank of America stated that India and China should be the only two emerging market economies that investors should focus on in 2015. But deciding which Chinese stocks to buy and how much to invest can be risky business for American investors.
Chinese regulatory standards for public companies are much more lax than American standards, and the lack of transparency in enforcement means that it is hard for American investors to count on Chinese law. History shows that this worry is not misguided.
A cautionary tale
In 2010, NYSE-listed China Marine Food Group Ltd paid over $27 million for an algae-based drink formula that has previously been valued at $8,800. When the SEC tried to investigate the acquisition, they were refused access to documents. The share price of China Marine subsequently fell more than 98 percent from its 2010 highs.
Morgan Stanley’s solution to Chinese investment risk
While there is only a handful of Chinese stocks that trade on American exchanges, Morgan Stanley’s China A Share Fund CAF is a fund comprised of Chinese investments. Typically, about 80 percent of the fund’s assets are A-shares of around 30 Shanghai and Shenzhen-listed stocks.

Without legal authority in China, U.S. investors are forced to trust in the behind-the-scenes operations of their Chinese investments. One potential way to mitigate the risk of buying Chinese stocks is to invest in a diversified fund such as Morgan Stanley’s China A Shares Fund.